The judgment was pursuant to an appeal filed by the Corporate Debtor (Neelkanth Township & Construction Pvt. Ltd.) against the order of the National Company Law Tribunal, Mumbai Bench (“NCLT”) directing the commencement of insolvency proceedings against the Financial Creditor.
The NCLAT has cleared the answer to several grounds, predominantly dealt with the following:
- Is a petition for initiation of Corporate Insolvency Resolution process barred by time i.e. does the Limitation Act, 1963, apply to the initiation of Corporate Insolvency Resolution process?
- Is a Debenture Holder a Financial Creditor?
- Incomplete application in terms of Section 7(3)(a) of Insolvency and Bankruptcy Code
National Company Law Appellate Tribunal (“NCLAT”) in Company Appeal (AT) (Insolvency) No. 44 of 2017 (Appeal) dealing with the applicability of Limitation Act, 1963 (Limitation Act) has observed that Limitation Act does not apply to proceedings under Insolvency and Bankruptcy Code.
The Financial Creditor assailed the impugned order of the NCLT on several grounds, amongst which one of the grounds was that Insolvency Application was a time barred debt and hence cannot be enforced by filing an application for Corporate Insolvency Resolution Process. The Financial Creditor contended that the claim of Corporate Debtor are completely time barred as the Debenture Certificates were due for redemption as far back as in the years 2011, 2012 and 2013 respectively; consequently, the application filed in the year 2017 is hopelessly time barred.
The NCLAT held that that in the absence of any provision in IBC, the Limitation Act, 1963 would not be applicable to initiation of Corporate Insolvency Resolution Process. The NCLAT further observed:
“…….There is nothing on the record that Limitation Act, 2013 is applicable to Insolvency and Bankruptcy Code. Learned Counsel for the appellant also failed to lay hand on any of the provision of Insolvency and Bankruptcy Code to suggest that the Law of Limitation Act, 1963 is applicable. The Insolvency and Bankruptcy Code, 2016 is not an Act for recovery of money claim, it related to initiation of Corporate Insolvency Resolution Process. If there is a debt which includes interest and there is default of debt and having continuous course of action, the argument that the claim of money by Respondent is barred by Limitation cannot be accepted.”
From the above it can be inferred that the NCLAT has treated the cause of action of non-payment of debt including interest as a continuous cause of action, thereby holding that no limitation period could expire hence the Law of Limitation would not apply to the Insolvency Application.
The second contention of the Financial Creditor was that Urban Infrastructure Trustees Ltd. is not a Financial Creditor as defined in Section 8(7) of the Insolvency and Bankruptcy Code; the Financial Creditor contended that “no financial debt” is owed to the Corporate Debtor. It was argued by the Corporate Debtor that the Debenture Certificates forming basis of claim for the alleged Financial Creditor do not fall with the definition of ‘financial debt’ as envisaged in Section 5(8)(c) of the Insolvency and Bankruptcy Code. It was further argued that since the Debenture Certificates issued were either carrying zero interest and/or one percent interest and the same were not disbursed against the consideration for time value of money as provided in Section 5(8)(c) of the Insolvency and Bankruptcy Code. Lastly it was also argued that the Debentures were merely an investment and hence do not come within the meaning of ‘financial debt’
However, the NCLAT held that section 5(8)(c) makes it clear that a debenture comes within the meaning of financial debt. Thus, in the present case, the amounts owed on maturity of debentures would be a financial debt. The NCLAT after discussing the definitions observed:
“28. Clause (c) of sub-section (8) of Section 5 deals with any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument.”
Lastly Section 7(3)(a) provides, “(3) The financial creditor shall, along with the application furnish—(a) record of the default recorded with the information utility or such other record or evidence of default as may be specified;”
The Insolvency & Bankruptcy Code and the Insolvency & Bankruptcy Board of India has not specified any other record or evidence of default which may be furnished. Further, as there was no record of default recorded with the information utility, it was contended that the application filed was incomplete. However, the NCLAT rejected the argument, holding that a procedural requirement could not frustrate the substantive provision of law. Failure of the Board to frame regulations could not be lead to inability of the adjudicating authority from dealing with application for initiation of insolvency resolution process.
The NCLAT also referred to the Rule 41 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 whereby a Financial Creditor is required to make an application in accordance with prescribed form – 1. Part V of the said form prescribes the particulars that need to be provided as part of the application. The NCLAT ruled that in absence any regulation framed by the Board, the evidence of default, records and documents prescribed under Part V of the Form – 1 will be sufficient to determine default of debt under Section 7 of the IBC. Regulation 8 of Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 was also relied upon to substantiate the documents and records the Financial Creditor could rely upon to prove a claim.
The current law of Insolvency and Bankruptcy has changed the position of law from the previous stands of the Courts in line of the laws laid under Companies Act, 1956 including the winding up proceedings. The prayer for winding up was previously considered only if the unpaid debt could be legally recovered in law, and the if the unpaid debt was hit by the bar of Limitation Act, 1963 then such winding up petition was not maintainable, though now the position is changed.
The present judgment of the NCLAT has clearly changed the scope of initiation of Insolvency Proceedings and has settled that any debt even if hit by the bars of limitation can be used to initiate Insolvency Proceedings against the Corporate Debtor.
The present judgment of the NCLAT was challenged in the Supreme Court though; the Apex Court dismissed the Civil Appeal keeping the question of law viz. whether the Limitation Act would apply to this proceeding, open.